It's Time to Buy Biotech

Yes there is political risk in this very volatile and speculative, "risk-on" market space...but that is what makes this trade so intriguing. One tweet from newly elected President Trump last week caused a 12 point drop in the $IBB exchange traded fund. At issue are federal regulations around the exorbitant prices some manufacturers charge for their medicines. For over a year, then candidate Trump complained of high prices and hinted at regulation to keep soaring healthcare costs in check. But with that risk now largely priced in, the way may be clear for this index to once again outperform...particularly if we get a reduction in corporate tax rates as promised during the campaign.

Moreover, today President Trump met with the CEO's of the major players in the space (LLY, MRK, AMGN, CELG) and all those stocks were up nicely on the day...a red market day at that. Talk was on how to keep manufacturing jobs here in the US, and the building of new plants by these companies made more cost effective through the reduction of regulation and streamlining of the permit process. A win win certainly for the big pharma companies if they can pull this off and maintain their current levels of profitability.

As we look at the chart of $IBB, we can see the massive rally that took place today on news of the Trump meeting. This pushes the index toward the upper edge of a narrowing triangle. This kind of pattern can break in either direction, but if it can close solidly above 282 on volume, the edge would be to the upside. The pattern targets the 320 area for a return on today's close of about 15%. You can raise this to about 45% by using the 3x Bull Biotech ETF, $LABU.

Posted to Dr. Stoxx Options Letter on Jan 31, 2017 — 4:01 PM
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